Consider Trimming Stock-Market Winners

With U.S. stocks back near record levels, investors should think about taking some chips off the table.

Selling part of an investment that has done well is important to keep a portfolio in balance and to reduce the risk of highly valued stocks and mutual funds declining and taking an investor’s profits down with them, financial advisers say.

“I don’t think clients take profits enough,” says Winnie Sun, the managing director of Sun Group Wealth Partners in Irvine, Calif. “A lot of times clients just buy and hold, which is great, except that you’ve now had five or six years of growing markets” and that can’t go on forever, she says.

Think of it like your regular haircut, she says. “We are not saying, ‘Sell the whole thing.’ We are saying, ‘Trim a little bit.’”

As clients take profits, she is steering some money to what she sees as bargains in stocks in Europe and Japan. Other clients use the profits from high-flying stocks to pay down debt or pay for a new car and home improvements in cash, she says.

Ross Gerber, the chief executive of Gerber Kawasaki in Santa Monica, Calif., is also a believer in trimming when investments have rallied. “Being a prudent investor is not being greedy,” he says.

Taking profits is particularly easy when the stocks or funds are in individual retirement accounts or other tax-sheltered plans because there aren’t any taxes to be paid on the sale. One rule he favors: If the price-earnings multiple of a company’s stock is higher than the rate of profit growth, it’s time to trim.

Not all stocks that have done well are ripe for profit taking, though. For example, Mr. Gerber warns against selling shares of Apple AAPL +1.08%, even though they have about doubled in the last three years.

Apple trades at around 14 times earnings, while the earnings are growing at a 15% to 20% rate. Mr. Gerber says the company keeps doing the right things. “We don’t just sell winners and take profits for no reason,” he says.

When Coca-Cola KO -0.19% last month posted flat sales for the most recent quarter, a Morgan Stanley MS -0.17% financial adviser in the Midwest called as many as 15 of his clients to suggest taking some long-term gains out of the stock. The adviser continues to be bullish about Coca-Cola’s long-term prospects, but he saw the weak results as a catalyst for taking some money off the table for now.

Convincing clients to sell a portion of blue-chip stocks can be difficult, the adviser says. Investors view stocks like Coca-Cola as a portfolio stalwart. But with broader market performance buoying investment gains over the last couple of years, “clients are more receptive” to selling those holdings in this environment, he says.

Ms. Sun says many of her clients still feel the pain from losing money when the tech bubble burst in 2000. Some of those losses could have been avoided if investors had taken some profits when markets were up.

Now, after several years of strong gains, she says, “We know it’s a matter of time until there will be some correction.”
By Matthias Rieker and Michael Wursthorn

Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor. Please consult your investment professional before acting on any advice.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor.